Friday, April 04, 2008

EDITORIAL >>Nelson keeps them honest

Sheffield Nelson, who can rightfully claim paternity for the natural-gas severance tax that the legislature enacted this week, worries that the legislature will return next year and dilute the tax. Producers and the owners of mineral rights, freed of the handshake deal with Gov. Beebe that brought about the tax, could indeed lobby for a lower rate or even more generous exploration incentives when the lawmakers reassemble in regular session in January. Arkansas will not have been collecting any revenues by then, so they could claim not to be slashing the highway program. They could do it by a simple majority in both houses, far less than the extraordinary votes by which the tax passed this week.

If it happens, Nelson warned, he would revive his 7 percent severance tax and put it on the ballot in 2010. Where has this man been? In Nelson’s two races for governor, against Bill Clinton and Jim Guy Tucker, we did not detect such grit or, for that matter, such progressive impulses.

But, frankly, we aren’t worried that the legislature will relapse on a program of which those members seemed genuinely proud. They authorized a major highway repair and building program that will cost neither motorists nor the general election one red cent. When does a public servant — or the taxpayers — come upon a deal like that?

Nelson nonetheless raises a good point. The act passed this week need not be the last word on the subject and shouldn’t be.

Although the act raises the severance tax on natural gas by something like a hundred times, the tax rate and its incentives or exemptions are far more generous than those in other states.

The tax rate of 5 percent of net revenues for the producers compares to 7.5 percent in Texas, 7 percent in Oklahoma and 6 percent in Mississippi, three states with expanding shale-gas opportunities.

Although no lawmaker raised the point, Beebe’s deal with the gas companies aroused some passionate critics. The gas from new shale wells will be taxed for the first three years not at 5 percent but at only 1.5 percent. The reduced rate is to allow producers to recover their investment — their exploration expenses — before paying the full rate. Other states provide incentives, too, but generally not quite so generous as that.

The reason for the incentives in other states was that shale drilling was risky and extremely expensive. Rebates, exemptions and lower start-up tax rates were to encourage investors to assume the higher risks. But technology has changed all that.

Horizontal drilling in shale plays is still expensive — $2.5 million to $3 million a well — but it is no longer risky and the payout is enormous.

Obviously, no one needs incentives to explore when the certain jackpot at the end is $8 to $10 a thousand cubic feet. Wells in the Fayetteville shale are pumping from 2 to 6 million cubic feet a day. At that rate, a company will recover its investment in months, not years.

Rather than worrying about lawmakers who would retreat on the tax, Nelson ought to use his considerable clout to persuade lawmakers to scale back the incentives. Oklahoma rebates some severance taxes only until a producer recovers its investment.

Then the full tax rate applies. That would be a good solution here.

Instead of a $50 million highway program next year, we could have a $100 million program, and probably closer to $200 million in five years. And no one need worry that it would stymie development of the immense shale play. They can’t manufacture drilling rigs fast enough.